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January 03. 2016

Market Review

U.S. averages finished the last week of the year with losses. For the week, the Dow Jones Industrial Average dropped 0.7 percent to finish the year at 17,425.03. The blue-chip benchmark finished 2015 down 2.2 percent, for its first annual loss since 2008. The S&P 500 declined 0.8 percent for the week to close the year at 2,043.94, snapping a three-year winning streak. The broad index suffered a 0.7 percent loss for 2015. The Nasdaq lost 0.8 percent during the week to end the year at 5,007.41, the only index out of the three to post a 5.7 percent gain for the year. That gain makes it four years in a row the Nasdaq has posted a yearly gain, its longest winning streak since 2007. All 10 S&P sectors ended in the red for the week, dragged by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 18.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that we remained outright cautious at the moment as we had received a growing number of evidences that the market was in the middle of a corrective top-building process. Moreover we mentioned that as long as our entire indicator framework (especially on a mid-term time horizon) did not turn bullish again, the current risk-/reward ratio remained to low. Above all, we highlighted that with such weak readings within our indicator framework, stronger gains tended to have a corrective character rather than being the start of a new sustainable breakout. In fact, after the false counter-trend rally on Tuesday towards 2,080 by the S&P 500, the broad index ended down for the week.

Apparently, the short-term oriented trend of the market remains quite unchanged compared to last week. Despite the fact that the S&P 500 closed slightly above the bullish threshold from the Trend Trader Index on Tuesday, it dropped back into the neutral territory quite quickly again on Wednesday and remained there for the rest of the week. So from a pure price point of view, the Trend Trader Index is indicating a quite neutral trend scenario. Nevertheless, we can see that both envelope lines of that reliable indicator are still drifting lower on a very fast pace. This is telling us that within the past 20 days we saw lower highs and lower lows, which is another typical pattern if the market remains short-biased. This can be also observed if we focus on the Advance-/Decline 20 Day Momentum, which remains quite bearish and has, therefore, refused to confirm the current levels from the S&P 500. As Advance-/Decline 20 Day Momentum Indicator tends to be a leading one, further bearish-biased consolidation looks quite likely as the indicator is trading more or less sideways on quite bearish levels. The case is slightly different if we focus on the Modified MACD as the indicator flashed a very weak but bullish crossover signal on Friday. Despite the fact that this can be interpreted as some form of positive divergence, the signal is still a way too weak to be taken too seriously at the moment.

If we focus on our short-term oriented breadth indicators, we can see that their readings are quite intermingled at the moment. The bullish readings from the Modified McClellan Oscillator Daily continued to strengthen, whereas the Modified McClellan Volume Oscillator Daily still remains bearish and is additionally far away from confirming the current levels from the S&P 500. As a matter of fact, the underlying tape momentum of the broad market can be described as quite flattish, as it has no clear direction for the time being. This can be also seen if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Both gauges just closed/kept trading slightly below their 50 percent threshold. This indicates that the underlying trend force of the market is quite bearish from a pure signal point of view, but still remains somehow neutral if we focus on their absolute levels. The same is true if we focus on the NYSE New HighsNew Lows Indicator, as we saw a strong reduction in the total amount of new lows together with a minor increase in new highs. As a matter of fact, the High-/Low-Index Daily flashed a very weak but bullish crossover signal last week. Despite the fact that this can be seen as quite constructive signal, the absolute levels from both indicators remain a way too weak to be taken too seriously at the moment.

The situation on the contrarian side also remains quite flattish at the moment. On a very short-time frame, market sentiment looks quite supportive at the moment, whereas the total amount of bears will definitely become a burden in 2016 (as a lot of purchasing power is getting pulled out of the market). Moreover, we can see that the Program Trading Buy/Sell Spread Indicator remains quite bearish, whereas the WSC Capitulation Index dropped from bearish into cautious territory. So unchanged compared to last week, from a pure contrarian point of view, further range bound trading looks quite possible (at least on a very short-time frame).

Mid-Term Technical Condition

On a mid-term time horizon, the technical trend-condition of the market still looks quite weak/vulnerable at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index has not managed to pass its bullish 60 percent threshold yet and is, therefore, definitely not confirming the current levels from the S&P 500. As already mentioned a couple of times, from a formal point of view, the market remains at risk for stronger pullbacks as long as its gauge keeps trading below that important threshold. Therefore, it was good to see that the gauge from the Global Futures Trend Index has shown some positive momentum recently and managed, therefore, to close within the upper part of its bearish consolidation area. If this trend continues, there might be a good chance that we receive a bullish signal within that indicator soon. If that is the case (only in combination with bullish mid-term tape readings), any upcoming rally attempt from the S&P 500 could easily turn out to be the start of a new sustainable up-trend. But as long as the gauge keeps trading below 60 percent (in combination with weak tape-readings), we remain outright cautious as the chances for a stronger slid remain outright high. So consequently, the upside potential of the market remains quite capped in such a situation as well. Nevertheless, from a pure price point of view, we can see that the mid-term oriented uptrend of the market has not been broken yet as the WSC Sector Momentum Indicator remains supportive. This shows that the momentum score of the S&P 500 is still trading above the momentum score of riskless money market within our Sector Heat Map. Nevertheless, the absolute momentum score of money market remains quite high. This can be seen as another piece of evidence that the technical market condition looks quite weak-kneed at the moment.

Basically, the same is true if we focus on mid-term oriented market breadth. The Modified McClellan Oscillator Weekly has not turned bullish so far, indicating that the overall mid-term oriented tape momentum of the market remains quite damaged for the time being. This can be also observed if we focus on the percentages of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Both indicators are signaling that there was not recovery within the broad market last week as most NYSE listed stocks remain in a mid-term oriented down-trend at the moment. This broad based non-confirmation can also be seen within our advance-decline indicators (Advance-/Decline Line in Percent and the Advance-/Decline Volume Line). Consequently it was not a big surprise at all, that the rally on Tuesday turned out to be a bull-trap as large cap driven rallies are hardly sustainable in their nature (as already mentioned last week). Another reason why we are still quite cautious at the moment is the fact that mid-term oriented down-volume is still dominating mid-term oriented up-volume. This is telling us that more volume went into declining stocks rather than advancing ones and, therefore, the market internals remain quite fragile. The only small positive signal is coming from the Advance-/Decline Index Weekly, which managed to flash a small bullish signal last week. So, despite the fact that we saw minor signs of improvements last week, the tape condition of the market still looks quite damaged for the time being. Consequently, the current risk-/reward ratio remains outright depressed and, therefore, it might be a bit too early for conservative members to get back into the market!

Long-Term Technical Condition

The long-term condition of the market remains quite vulnerable as the Global Futures Long Term Trend Index remains outright bearish at the moment. This is telling us that the overall market environment for U.S. equities remains challenging. This can be also seen if we focus on the WSC Global Momentum Indicator as only 8 percent of all local market indexes around the world managed to close above their long-term oriented trend-lines. In a global context, we, therefore, received further confirmation that global equity markets remain at risk for further sideways trading/disappointments. Therefore, it is not a big surprise that the relative strength of all risky markets kept trading far below the one from U.S. Treasuries. Above all, we can see that long-term oriented market breadth has also not shown any signs of bullish divergences yet. As per last week’s report, the Modified McClellan Volume Oscillator Weekly still remains bearish, whereas the percentage of stockss which are trading above their long-term simple moving averages and the High-/Low Index Weekly are far away from being supportive.

Bottom Line

The overall outlook remains unchanged compared to last week. The market remains in the middle of a (still corrective looking) consolidation process. Therefore, conservative members should keep staying on the sideline as the current risk-/reward ratio is too low at the moment. Consequently, the chances for a fast paced slid remains quite high. From a pure trading point of view, 2,000/1,980 represents an important key support level. A break below that numbers would indicate that further down-testing towards 1,948 and 1,920 can be expected. On the other hand, we think the market looks quite capped on the upside as any upcoming bounce towards the recent May top should be limited in price and time. As a matter of fact, any upcoming bounce without corresponding improvements within our core-indicator dashboard should be limited in price and time. Stay tuned!